(About New York)
NEW YORK — Not only do people come to New York City from all over the world. So do pension funds, from other countries and states, buying Manhattan real estate and often making tremendous profits.
But that’s not how we locals do it.
The Retirement Systems of Alabama bought 55 Water St. in 1993 for $202 million, and owns it through a subsidiary, debt free. One of the largest private office buildings in the country, 55 Water has given double-digit returns most years since then. The value of the property today, based on recent sales in lower Manhattan, could easily be 15 times what it cost.
You can find a plaque identifying the owner of the building in the lobby.
You can also find, in the building directory, that among the tenants paying rent to Alabama is the pension fund of the New York City teachers.
In fact, all of the city’s pension funds — there are five, involving cumbersome, wasteful duplication that burns up more than $160 million unnecessarily, according to the Citizens Budget Commission — are tenants, not owners of the multiple spaces where they do business. Perhaps renting is a prudent approach if the city must have five pension fiefs.
Still, the ownership of 55 Water by the Alabama pensions is a reminder of how differently, and at times purposely inefficiently, the city’s retirement systems carry out their task of investing. Alabama’s public pension funds amounted to about $34 billion at the end of last year. The five New York City funds hover at $190 billion.
Yet unlike Alabama, the city pension systems own almost no real estate directly. Instead, real estate investments are done through funds that hold portfolios of property. That means the city pays an annual management fee on those investments, plus a cut of the profits. The pension funds had $8.3 billion invested this way as of Sept. 30. How much are those fees, and what are the profits? The city won’t say, but insists that it uses its economic might to negotiate favorable fees. One person with extensive knowledge of the city’s approach says management fees can be about 1 to 1.5 percent, and that the profit share for the manager can be around 20 percent. These are estimates.
New York City fancies itself a global financial capital, but its government has not been able to mount an in-house investment team for the pension funds that can directly invest not only in real estate, but in all other sectors. Instead, it employs a legion of external managers, often at enormous cost and with little gain. “In the aggregate, external managers failed to add substantial value to the five NYC pension funds over the 10-year period studied,” according to a 2015 report by Scott C. Evans, the deputy city comptroller and chief investment officer.
In fact, despite being paid billions in fees, the managers hired by the city funds underperformed their benchmarks by $2.5 billion, Scott Stringer, the city comptroller said.
Much of that has to do with the power of the unions that serve as co-trustees with city officials on pension boards, and state legislation that limits the city’s power to consolidate its funds and lower its costs.
When it comes to real estate investments, the use of funds that hold many properties can help reduce the city’s risks, and provide expertise on markets around the country. Going forward, Stringer said last month, he hoped the funds generally would be able to do more in-house and rely less on outside managers.
With the city treasury rolling in money, and with politicians cycling through offices every eight years because of term limits, there are few public officials pushing for reforms to a pension system whose problems and liabilities are years away.
Still, it seems that people outside the five boroughs are better able to see real estate gold in the city streets.
The Ohio teachers pension system owns the retail portion of 15 Union Square West. TIAA, which manages investments for nonprofits, owns property in Tribeca and the Meatpacking District. The California public employee pension plan, CalPERS, bought an office tower at 787 Seventh Ave. in 2016 for $1.9 billion, and has spent another $800 million on real estate in the last five years.
In 2003, the New York State Teachers Fund bought a 49 percent interest in 245 Park Ave., near Grand Central, for $438 million; last year, the teachers fund and the other owner sold it for $2.2 billion.
They doubled their money in 14 years, and got returns along the way.This article originally appeared in The New York Times.